Rite Aid's Q4'14 Earnings: Wellness Stores Drive Growth

Backed by its store re-modeling initiative, efficient cost management and customer loyalty programs, leading U.S. drugstore chain Rite Aid reported its sixth consecutive quarter of positive net income in Q4 2014. The company witnessed a 2.2% growth in its Q4 2014 revenue primarily on account of an increase in pharmacy gross profit, driven by generic purchasing efficiency as well as an increase in front-end gross profits. Rite Aid’s ongoing expense control measures benefited the company in the quarter. Q4 2014 net income stood at $57 million as compared to $124 million in Q4 2013. However, if we exclude LIFO charges and losses on debt retirement from the results of both years, net income this year was higher by $29 million.

Fiscal 2014 was Rite Aid’s second profitable year in more than five years as the company benefited from its ongoing health and wellness transformation. Though its fiscal 2014 revenue increased only marginally, net income almost doubled compared to fiscal 2013. The company believes that the continued positive growth momentum places it in a position to evolve its strategy from one that focuses on turning the company around to one that emphasizes on growth.

Effectively leveraging its cost structure, investing in new stores and making operational progress remain key focus areas for Rite Aid, as it aims to build a unique brand focused on health and wellness. In fiscal 2014, the company completed additional refinancing to extend maturities and reduce its interest expense, factors that give it the required flexibility to better execute its business plan.

We will update our valuation for Rite Aid after the fiscal 2014 earnings release.

Loyalty programs such as the Wellness+ program have been one of the key factors driving growth in Rite Aid’s pharmacy sales, as well as front-end sales. The Wellness+ program helps strengthen the relationship with customers, which in turn increases the number of loyalty shoppers at Rite Aid. It remains a key component of Rite Aid’s health and wellness offering. The company made significant progress in transforming its stores into true neighborhood destinations for health and wellness in fiscal 2014. Last quarter, Rite Aid completed 94 remodels, 3 expansions and 2 relocations, taking the total number of Wellness stores to 1,215. It plans to remodel an additional 450 stores in fiscal 2015.

The Wellness store continues to outperform the non-wellness stores in terms of same-store front-end sales and script count. In fiscal 2014, front end same-store sales in the wellness stores exceeded the non-wellness stores by 3.2 percentage point and script growth in the wellness stores exceeded the non-wellness stores by 1 percentage point.

Last year, Rite Aid successfully launched its Wellness65+ program, which is aimed at senior patients who are known to be higher spenders in the pharmacy category. By the end of fiscal 2014, 1.7 million senior citizens had enrolled in the program and Rite Aid claims that the program is attracting new customers as well as strengthening the loyalty of its existing members. According to a 2012 RAND Health study, wellness programs are the rage in corporate America, with half of surveyed companies offering wellness promotion programs.

Rite Aid’s immunization program is another key component of its chain-wide wellness program. It exceeded its chain-wide goal by immunizing more than 3.2 million patients against the flu last year. Its Wellness stores, which feature the Wellness ambassadors, averaged 38% more flu shots than non-wellness stores.

Wellness stores will continue to be a key part of Rite Aid’s growth strategy over the next few years.

This month, Rite Aid made two acquisitions – Health Dialog Services Corporation and RediClinic – to advance its retail and wellness strategy.

Health Dialog Services Corporation is a health coaching and analytics firm which provides in-store care coaches. Rite Aid believes that the company will play a key role in advancing its Health Alliance program. It expects to benefit from Health Dialog’s industry-leading analytics and shared decision making tools as it focuses on further strengthening its healthcare offering.

RediClinic is a leading retail clinic operator operating across 30 locations in the greater Houston, Austin and San Antonio areas. Post the acquisition, RediClinic will become a subsidiary of Rite Aid. Retail clinics play an importance role in today?s healthcare delivery system and will benefit Rite Aid’s overall health and wellness strategy. Rite Aid intends to leverage RediClinic’s expertise to deliver convenient healthcare and wellness programs to its customers in select markets. Rite Aid plans to open 70 new RediClinic over the next 18 to 24 months.

Rite Aid also announced an expanded tie-up with McKesson Corporation, the largest distributor of pharmaceutical and medical supplies in the US. The new partnerships are in line with the company’s strategy to expand its offerings to cover a broader range of health products and services.

Fiscal 2015 Guidance/>/>

- Rite Aid expects the second half of fiscal 2015 to be stronger than the first two quarters, due in part to the strength in fiscal 2014′s first half as well as the introduction of several new generics in the second half of fiscal 2015.

- Total sales to be between $26 billion and $26.5 billion.

- Adjusted EBITDA to be between $1.33 billion and $1.4 billion.

- Same-store sales to increase by 2.5% – 4.5%, including the anticipated negative pharmacy sales impact of new generic introductions and continued reimbursement rate pressure.

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